The Australian economy is slowing and there’s now a real chance that corporate earnings for the last half of 2008 and the first half of the new financial year, starting today, might miss estimates as a result.
Some analysts are warning that revenue and earnings could be hit by the sharp rise in energy costs (which is what Boral was warning about) and the rising cost of money and its lack of availability.
For our banks, the slowing credit figures do not making happy reading, even though they are now more dominant in the lending markets.
Demand for all forms of credit is fading and banks make profits from lending us our money, not from holding it.
Funds management returns have plunged and it is going to be increasingly tough for the financial groups.
The Reserve Bank’s campaign to slow inflation is working, as activity in the domestic sector continues to slide.
Earnings updates in recent days are hinting at slowing conditions and tightening profit margins, with the next six months looking much tougher.
The RBA is unlikely to do anything to rates: it will simply wait and monitor the economy until next month’s meeting which will consider the June quarter Consumer Price Index which is out in three weeks.
Even if that is high, as it will be, the RBA will sit and continue to watch the economy slow, especially with the sharp turnaround in sentiment offshore in recent weeks.
If the present situation continues, or the slowdown deepens, we will be looking at a rate cut sometime in the first half of next year.
Private credit figures released by the central bank yesterday show an economy now clearly heading lower with housing activity stumbling, business lending easing from the highs of late last year and personal credit up a fraction in May, but still hesitant.
Overall credit growth has slowed to a level last seen in late 2005, and there’s every sign it will continue sliding for some months to come.
Total private sector credit rose by 13.4% in the year to May, compared to 14.1% in the year to April.
Housing lending is now at a 17 year low, matching the slump in consumer confidence.
Housing credit grew by 10.6% in the year to May, which was the slowest annual pace since August 1991 when home loan take-up grew by 10.3%.
Home borrowing, which rose by 0.6% in May, moderated for the third month in a row.
The small growth in personal lending in May was still at the weakest pace in six years. It rose 0.5% in May, compared to 0.1% in April (and negative for a couple of months earlier in the year), but was less than 10% in the year at 8.8% (9.8% for the year to April).
Four interest rate rises since August last year, the credit crunch and extra rises from banks on top of the 1% increase from the RBA, soaring inflation, petrol prices and food costs, have combined to drop confidence, lending and consumption.
Business credit rose by 18.2% in the year to May, its slowest annual pace since May 2007. It rose 0.6% in May from April when it was 0.1% up on March.
The RBA’s credit figures were after the TD Securities/Melbourne Institute monthly inflation gauge for June showed an acceleration in headline price pressures and in the 12 month to June to 4.8%, up from around 4.5% in the year to May.
On the face of it that’s worrying and will probably be echoed by the Consumer Price Index for the June quarter.
But the big driver was the surging cost of oil and petrol which have risen 25% in the past year according to the survey.
Stripping those out the survey showed that the index was up just 0.1% in June, down from 0.2% in May and 0.4% in each of April and March, an indication that the RBA’s anti-inflation attack is taking root in the wider economy.
With retail sales and building approvals for May due for release tomorrow and expected to show another month of easing to flat activity, the RBA will do nothing at the meeting and will to wait until August when it will have updated analysis of the CPI, the health of the economy and new forecasts for the next 18 months or so.
